What Are The G-20 Rules For Talking Down Your Currency?

With Abe talking his down explicitly, Weidmann talking his up explicitly, Draghi's subtle talk-down, Hollande's outright plea, and the developing world in full 'war' mode, Citi's Steven Englander sets out some brief 'rules of engagement' for the G-20 nations as competitive devaluation escalates.

Via Citi's Steven Englander:

There are rumors that G2, G7 or G20 will make some comments on currency wars/competitive devaluations, in response to Japan’s perceived transgressions. Oddly enough Japan has not actually implemented any policy yet. It is unclear whether G20 rules apply to what they say, rather than to what they do. Most likely some statement will merge this week. It will possibly have a short term effect on the yen, but it seems very likely that a modest shift in language and no shift in intended policies will enable Japan to do all that it intends to do, including weaken the yen.

The parameters of acceptability on comments influencing the exchange rate are not well defined, but seem pretty broad. At the end of this note, we have a selection of comments that suggest it is ok say:

1) my currency is expensive;

2) my currency’s depreciation has done a lot of good;

3) our currency affects our exchange rate;

4) we really don’t like the appreciation of our currency.

You can even say “we will expand our balance sheet by 40% at an annual rate and if you don’t like it, you can do the same, but you can’t intervene” (which is basically the Fed/Treasury’s stance).

Unilateral intervention is debated in G20, and is supposed to be a no-fly zone in G7. Set aside Switzerland, which doesn’t bother answering the phone when G7 calls. It is unlikely that direct criticism of Japan will get very far in G20, given intervention and reserves accumulation by EM countries and balance sheet expansion by G4. Too many fingers will point back at accusers.

Japanese officials may also point out that their share of global trade is back where it was in 1965.

The degree to which yen depreciation affects global trade is not what it used to be when Japan had a 10+% share. Its export share is now about 40% of what it was in the mid-1990s and falling.

G7 (and G20) like to operate by consensus, so they will try and get Japan to agree to some non-offensive language that other members will view as limiting Japan’s ability to weaken its currency. Given how broad the parameters are, there is likely some broad language that Japan can agree to – they are already shifting their language to Fed/BoC-like comments that depreciation is neither a target not a tool, but a consequence of their domestic policies. My personal advice is that Japan adopt the language in the Bernanke quote below and insist they are pursuing policies that will strengthen the yen in the medium term.

It is possible the US and the euro zone will issue a joint statement on currency manipulation, but it is unlikely to be specific to Japan. It will cite a number of practices that Japan will deny represent its intentions. And JPY can keep falling.

As a footnote, there is a strong academic case that countries with deflation and zero rates should be allowed to pursue a weaker currency openly as a policy tool. The reason is that there is no real conventional monetary tool they have left and if they are in a true liquidity/deflation trap, adding more domestic liquidity will not have much impact on real rates. The only way to get activity going may be to crowd in both exports and inflation via a weaker currency. It is a case both Japan and Switzerland can make, but not one that most EM interventionist countries can plausibly argue applies to them.

The first rule of currency devaluation is you do not talk about currency devaluation to the public, and if it does ever come up then you point to all of the books written by PhD economists that read "to increase exports the currency must be devalued".

Then remind everyone in order to increase GDP then one must increase exports. Yes, it is circular logic, but no one knows what circular logic is anyway.

While the statists in NJ are going to vote on insane gun control measures this week... there's 24, yes TWENTY FOUR bills to restrict gun ownership that will be considered this week. A few of them :

Assembly Bill 3676:This bill would require any person applying for a firearms purchaser identification card or permit to purchase a handgun to submit the results of a psychological evaluation before being issued the card or permit. The bill also would require applicants to have an on-site inspection and evaluation of the household where the firearm will be located. The purpose of the inspection and evaluation is to ensure the person meets all the qualifications to purchase a firearm.

Assembly Bill 3688:This bill would require any person applying for a firearms purchaser identification card or handgun purchase permit to submit the results of a mental health evaluation as a prerequisite for issuance of the card or permit. The bill also would require applicants to submit a list of the names of every person residing in the applicant's household and whether the person has a mental illness.

Assembly Bill 3666:This bill would make mail order, Internet, telephone, and any other anonymous method of ammunition sale or transfer illegal in New Jersey

Revises definition of destructive device to include certain weapons of 50 caliber or greater. This bill is an attack on gun owners and sportsmen, banning many popular firearms and forcing their sale, destruction, or confiscation by the state. Pretends to ban only the .50 BMG rifle, but bans every rifle-barreled shotgun in the State (one of the most popular and widely used firearms), and many modern hunting rifles and handguns. Although the bill attempts to exempt shotguns, rifle-barreled shotguns are NOT covered by the exemption, because they do not have a smooth bore and therefore do not fit within New Jersey’s definition of “shotgun” under 2C:39-1(n). That definition specifies that a firearm must have a smooth bore (meaning no rifling) in order to be considered a shotgun. This legislation would also ban numerous rifles and handguns (see detailed list at the end of this document for particulars). This legislation contains no grandfathering; if it passes, gun owners will be under threat of criminal prosecution and incarceration if they do not sell, destroy, or turn these firearms in to the State in a forced buyback within one year.

Assembly Bill 3754:Requires firearms seizure when mental health professional determines patient poses threat of harm to self or others. Analysis: Gives unprecedented power to suspend Constitutional rights and seize firearms to unaccountable health professionals, who are defined to include nurses, social workers, and marriage counselors!

When Nixon went off the gold standard ( supposedly temporarily ) in 1971 in total disregrd of Bretton woods II to which there were ( correct me if I'm wrong ) 153 heads of state as signatories, the USA lost all credibility as far as any form of currency accord is concerned go.

Who could possibly fall for these crooks bullshit now and think that currency wars will be averted?

Gotta question the myopia of the Japanese "leadership". When you have to import every necessary commodity in order to function, raise taxes to help pay for just the interest payments ( forget about paying down debt), yeah this will be inflationary in no time flat, it will also lead to a recession in no time flat. Kudos to Abe for reintroducing that wonderful phenomenon called stagflation.